Every year, many Americans take out early income tax loans from their filing agent. Many of these loans carry hefty fees that must be paid back when the taxpayer's income tax refund check is received. While early filing is always a good measure to avoid last-minute rushes, some tax filing agents are using the early filing loans as a way of getting additional income for their business.
E-filing and Early Income Tax Loans
Early filing loans were made possible by the evolution of e-filing. Each year, about 80 million American taxpayers file their taxes electronically. The growth of electronic filing has enabled tax filing agents to devise strategies to get more money for their services by enticing filers with early loan ideas.
How the Process Works
Early income tax loans, or “refund anticipation loans,” are offered to filers on one condition: That they are expecting IRS refunds. Tax filing agents will make the loan based on the expected refund. They will also charge a loan fee of between $30 and $90 depending on the value of the refund check and an electronic filing fee of about $40 per filing. In lieu of the loan, the tax filer signs away his income tax refund check to the agent who granted him the loan. The early filing income tax loan will be available usually in about two days after the filing. While the early income tax loans may be offered anytime during the tax year, the bulk of these loans are granted from February to April, the peak tax period.
An early income lax loan may help you if you need emergency cash. But remember that it comes with some interest added. You will have to repay the loan plus the agreed fee when your IRS refund check is received. If you have no need for emergency cash, taking this early loan is not your best option. Your IRS refund check should come fast if you use the e-filing method; why not save your money and wait for your check? You should receive your check in about half as much time as traditional mail takes.
Many people have described the early income tax loans as a ripoff. The loans are generally targeted at lower- and middle-income people. The fees charged are high. According to research conducted by the Consumer Federation of America and the National Consumer Law Center, 12 million American taxpayers paid about $900 million worth of fees to get early income tax loans in 2008. The annualized rate of the loans, along with the fees charged by the filing companies, adds up to about 222 percent.
Alternative Methods for E-filing
The IRS Volunteer Income Tax Assistance Program helps taxpayers with their electronic filing through third-party agents. The free program is designed to help middle- and low-income taxpayers file their taxes electronically.